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Exchange Rate Volatility and Inflation Upturn in Nigeria: Testing for Vector Error Correction Model

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  • Adeniji, Sesan

Abstract

This paper empirically examines the impact of exchange rate volatility on inflation in Nigeria using annual time series data from 1986 – 2012. The methodology employed includes: ADF, PP and KPSS test of unit root, Johansen Julius cointegration test, VECM, granger causality test, impulse response function and variance decomposition. The unit root test result shows that all variables are stationary at first difference, while Maxi-eigen value shows a long run relationship between the variables. VECM result established positive and significant relationship between inflation, exchange rate volatility, money supply and fiscal deficit, while gross domestic product show negative relationship. Granger causality outcome shows a bi-directional relationship between all the variables. Subsequently, exchange rate volatility is deduced to influence inflation in Nigeria. Therefore, it becomes imperative for the government to understand and control the various channels through which exchange rate transmits to affect inflation in Nigeria, check the growth of money supply, increase the level of productivity in the country and lastly cut down public sector expenditure and possibly make a shift from excessive consumption expenditure to capital expenditure believing this will reduce the burden of fiscal deficit and the rate of inflation.

Suggested Citation

  • Adeniji, Sesan, 2013. "Exchange Rate Volatility and Inflation Upturn in Nigeria: Testing for Vector Error Correction Model," MPRA Paper 52062, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:52062
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    References listed on IDEAS

    as
    1. Egwaikhide, F.O. & Chete, L.N. & Falokun, G.O., 1994. "Exchange Rate Depriciation, Budget Deficit and Inflation - The Nigerian Experience," Papers 26, African Economic Research Consortium.
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    3. Steven B. Kamin & Marc Klau, 2003. "A multi-country comparison of the linkages between inflation and exchange rate competitiveness," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(2), pages 167-184.
    4. Burcu Aydin, 2010. "Exchange Rate Assessment for Sub-Saharan Economies," IMF Working Papers 2010/162, International Monetary Fund.
    5. Mr. Elie Canetti & Mr. Joshua E. Greene, 1991. "Monetary Growth and Exchange Rate Depreciation As Causes of Inflation in African Countries: An Empirical Analysis," IMF Working Papers 1991/067, International Monetary Fund.
    6. Gawon Yoon, 2009. "Are real exchange rates more likely to be stationary during the fixed nominal exchange rate regimes?," Applied Economics Letters, Taylor & Francis Journals, vol. 16(1), pages 17-22.
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    More about this item

    Keywords

    Exchange rate volatility; inflation upturn; vecm; granger causality; impulse response and variance decomposition;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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